EQUUS TOTAL RETURN, INC. 10-K/A

Item 8. Financial Statements and Supplementary Data Index to Financial Statements Page Report of Independent Registered Public Accounting Firm - (BDO USA, LLP; Houston, TX; PCAOB ID# 243 ) 38 Balance Sheets—As of December 31, 2022 and December 31, 2021 40 Statements of Operations—For the years ended December 31, 2022, 2021 and 2020 41 Statements of Changes in Net Assets—For the years ended December 31, 2022, 2021 and 2020 42 Statements of Cash Flows— For the years ended December 31, 2022, 2021 and 2020 43 Statements of Selected Per Share Data and Ratios - For the years ended December 31, 2022, 2021, 2020, 2019 and 2018 44 Schedule of Investments—December 31, 2022 45 Schedule of Investments—December 31, 2021 47 Notes to Financial Statements 49 Schedules of Investments in and Advances to Affiliates — For the year ended December 31, 2022 66 37 Table of Contents Report of Independent Registered Public Accounting Firm Shareholders and Board of Directors Equus Total Return, Inc. Houston, Texas Opinion on the Financial Statements We have audited the accompanying balance sheets of Equus Total Return, Inc. (the “Fund”), including the schedules of investments, as of December 31, 2022 and 2021, the related statements of operations, changes in net assets, and cash flows for each of the three years in the period ended December 31, 2022, and the related notes and financial statement schedule listed in the Table of Contents in Item 15(a)(1) (collectively referred to as the “financial statements”) and the selected per share data and ratios for each of the five years in the period then ended. In our opinion, the financial statements present fairly, in all material respects, the financial position of the Fund as of December 31, 2022 and 2021, and the results of its operations, changes in net assets, and its cash flows for each of the three years in the period ended December 31, 2022, and the selected per share data and ratios for each of the five years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements and the selected per share data and ratios are the responsibility of the Fund’s management. Our responsibility is to express an opinion on the Fund’s financial statements and the selected per share data and ratios based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Fund in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and the selected per share data and ratios are free of material misstatement, whether due to error or fraud. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements and the selected per share data and ratios, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements and the selected per share data and ratios. Our procedures included confirmation of securities owned as of December 31, 2022, and 2021 by correspondence with the custodians. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and the selected per share data and ratios. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates. Valuation of Control Investment The Fund's Control Investment at fair value was $15.65 million at December 31, 2022. As described in Note 3 to the financial statements, the Fund’s investment portfolio is comprised of limited liability company investments, which has been determined to be a Level 3 investment and utilizes inputs that are unobservable and significant to the fair value measurement. Management engaged an independent third-party firm to assist in the determination of the fair value estimate of the Fund’s Control Investment. 38 Table of Contents We identified the valuation of the Control Investment as a critical audit matter. The principal considerations for our determination are the valuation techniques utilized to value this investment such as the guideline transaction method and the discounted cash flow method, and the use of unobservable inputs in these valuation techniques which include acreage value, proved reserve multiple, daily production multiple and discount rate. Auditing these elements was complex because it involved especially subjective auditor judgment, including the extent of specialized skills and knowledge needed. The primary procedures we performed to address this critical audit matter included: · Testing the completeness and accuracy of the underlying information used as inputs in both the guideline transaction method and the discounted cash flow method. · Testing mathematical accuracy of the discounted cash flow method. · Utilizing personnel with specialized knowledge and skill in valuation to assist in: (i) evaluating the appropriateness of the valuation models used, (ii) evaluating whether unobservable inputs, such as the acreage value, proved reserve multiple, daily production multiple, and discount rate were reasonable, and (iii) testing mathematical accuracy of the guideline transaction method. /s/ BDO USA, LLP We have served as the Company's auditor since 2014. Houston, Texas March 28, 2023 39 Table of Contents EQUUS TOTAL RETURN, INC. BALANCE SHEETS December 31, 2022 December 31, 2021 (in thousands, except shares and per share amounts) Assets Investments in portfolio securities at fair value: Control investments (cost at $ 8,111 and $ 7,961 , respectively) $ 15,650 $ 13,000 Total investments in portfolio securities at fair value 15,650 13,000 Temporary cash investments 5,998 2,500 Cash and cash equivalents 19,224 23,465 Restricted cash 60 25 Accounts receivable from affiliates 350 350 Other assets 382 376 Total assets 41,664 39,716 Liabilities and net assets Accounts payable 107 46 Accrued compensation 321 792 Accounts payable to related parties 1 13 Borrowing under margin account 5,998 2,500 Total liabilities 6,427 3,351 Commitments and contingencies (see Note 6) Net assets Common stock, $ 0.001 par value per share; 100,000,000 and 50,000,000 shares authorized and 13,518,000 shares issued and outstanding as of December 31, 2022 and December 31, 2021, respectively Preferred stock, $ 0.001 par value per share; 10,000,000 and 5,000,000 shares authorized, respectively Common stock, par value $ 13 $ 13 Capital in excess of par value 74,685 74,685 Accumulated deficit ( 39,461 ) ( 38,333 ) Total net assets $ 35,237 $ 36,365 Net asset value per share $ 2.61 $ 2.69 The accompanying notes are an integral part of these financial statements 40 Table of Contents EQUUS TOTAL RETURN, INC. STATEMENTS OF OPERATIONS Year Ended December 31, (in thousands, except per share amounts) 2022 2021 2020 Investment income: Interest and dividend income: Non-affiliate investments - related party $ — $ — $ 291 Total interest and dividend income — — 291 Interest from temporary cash investments — — 3 Other income - director fees — — 24 Total investment income — — 318 Expenses: Compensation expense 1,564 1,632 3,155 Professional fees 815 720 1,107 Director fees and expenses 325 329 335 Professional liability expenses 720 517 283 General and administrative expenses 130 140 168 Mailing, printing and other expenses 56 87 86 Taxes 15 25 22 Interest expense 4 3 27 Total expenses 3,629 3,453 5,183 Net investment loss ( 3,629 ) ( 3,453 ) ( 4,865 ) Net realized gain (loss): Affiliate investments — — 21,287 Non-affiliate investments - related party — — ( 2,486 ) Non-affiliate investments — — ( 266 ) Escrow receivable — 429 — Temporary cash investments 1 — 8 Net realized gain (loss) 1 429 18,543 Net unrealized appreciation (depreciation) of portfolio securities: Control investments 2,500 5,650 ( 1,561 ) Affiliate investments — — ( 26,150 ) Non-affiliate investments - related party — — 1,741 Net change in net unrealized appreciation (depreciation) of portfolio securities 2,500 5,650 ( 25,970 ) Income Taxes Federal and state income, excise and other taxes — ( 38 ) — Net increase (decrease) in net assets resulting from operations $ ( 1,128 ) $ 2,588 $ ( 12,292 ) Net increase (decrease) in net assets resulting from operations per share: Basic and diluted $ ( 0.08 ) $ 0.19 $ ( 0.91 ) Weighted average shares outstanding: Basic and diluted 13,518 13,518 13,518 The accompanying notes are an integral part of these financial statements 41 Table of Contents EQUUS TOTAL RETURN, INC. STATEMENTS OF CHANGES IN NET ASSETS Common Stock (in thousands) Number of Shares Par Value Capital in Excess of Par Value Accumulated Deficit Total Net Assets Balances as of January 1, 2020 13,518 13 56,062 ( 10,086 ) 45,989 Share-based incentive compensation — — 80 — 80 Net decrease in net assets resulting from operations — — — ( 12,292 ) ( 12,292 ) Balances as of December 31, 2020 13,518 13 56,142 ( 22,378 ) 33,777 Recharacterization of net capital gains — — 18,543 ( 18,543 ) — Net increase in net assets resulting from operations — — — 2,588 2,588 Balances as of December 31, 2021 13,518 13 74,685 ( 38,333 ) 36,365 Net decrease in net assets resulting from operations — — — ( 1,128 ) ( 1,128 ) Balances as of December 31, 2022 13,518 $ 13 $ 74,685 $ ( 39,461 ) $ 35,237 The accompanying notes are an integral part of these financial statements. 42 Table of Contents EQUUS TOTAL RETURN, INC. STATEMENTS OF CASH FLOWS Year Ended December 31, (in thousands) 2022 2021 2020 Reconciliation of (decrease) increase in net assets resulting from operations to net cash (used in) provided by operating activities: Net (decrease) increase in net assets resulting from operations $ ( 1,128 ) $ 2,588 $ ( 12,292 ) Adjustments to reconcile net (decrease) increase in net assets resulting from operations to net cash (used in) provided by operating activities: Net realized (gain) loss: Affiliate investments — — ( 21,287 ) Non-affiliate investments -related party — — 2,486 Non-affiliate investments — — 266 Escrow receivable — ( 429 ) — Temporary cash investments ( 1 ) — ( 8 ) Net change in unrealized appreciation of portfolio securities: Control investments ( 2,500 ) ( 5,650 ) 1,561 Affiliate investments — — 26,150 Non-affiliate investments -related party — — ( 1,741 ) Share-based incentive compensation — — 80 Purchase of portfolio securities ( 150 ) ( 350 ) ( 561 ) Dividends exchanged for portfolio securities — — ( 156 ) Net proceeds from dispositions of portfolio securities 429 26,791 (Purchases) sales of temporary cash investments, net ( 3,497 ) 21,500 4,997 Changes in operating assets and liabilities: Accounts receivable from affiliates — — 350 Accrued interest and dividend receivable — — 489 Accrued esrow receivable — 3,413 ( 3,413 ) Other assets ( 6 ) ( 195 ) ( 40 ) Accounts payable and accrued liabilities ( 410 ) ( 206 ) ( 23 ) Accounts payable to related parties ( 12 ) 11 963 Net cash (used in) provided by operating activities ( 7,704 ) 21,111 24,614 Cash flows from financing activities: Borrowings under margin account 16,997 2,500 104,001 Repayments under margin account ( 13,499 ) ( 24,000 ) ( 108,992 ) Net cash provided by (used in) financing activities 3,498 ( 21,500 ) ( 4,991 ) Net (decrease) increase in cash and cash equivalents ( 4,206 ) ( 390 ) 19,623 Cash and cash equivalents and restricted cash at beginning of period 23,490 23,879 4,256 Cash and cash equivalents and restricted cash at end of period $ 19,284 $ 23,490 $ 23,879 Non-cash operating and financing activities: Accrued interest or dividends exchanged for portfolio securities - related party $ — $ — $ 489 Supplemental disclosure of cash flow information: Interest paid $ 4 $ 4 $ 14 Income taxes paid $ 53 $ 25 $ 12 The accompanying notes are an integral part of these financial statements. 43 Table of Contents EQUUS TOTAL RETURN, INC. SELECTED PER SHARE DATA AND RATIOS Year ended December 31, 2022 2021 2020 2019 2018 Investment income $ — $ — $ 0.02 $ 0.03 $ 0.04 Expenses 0.27 0.26 0.38 0.28 0.31 Net investment loss ( 0.27 ) ( 0.26 ) ( 0.36 ) ( 0.25 ) ( 0.27 ) Net realized gain (loss) 0.00 0.03 1.37 ( 0.20 ) — Net change in unrealized appreciation of portfolio securities 0.19 0.42 ( 2.05 ) 0.58 0.36 Net change in unrealized depreciation of portfolio securities - related party — — 0.13 0.03 ( 0.09 ) Net increase (decrease) in net assets resulting from operations ( 0.08 ) 0.19 ( 0.91 ) 0.16 — Capital transactions: Shares issued for portfolio securities — — 0.01 0.02 0.04 Decrease in net assets resulting from capital transactions — — 0.01 0.02 0.04 Net increase (decrease) in net assets ( 0.08 ) 0.19 ( 0.90 ) 0.18 0.04 Net assets at beginning of period 2.69 2.50 3.40 3.22 3.18 Net assets at end of period, basic and diluted $ 2.61 $ 2.69 $ 2.50 $ 3.40 $ 3.22 Weighted average number of shares outstanding during period, in thousands 13,518 13,518 13,518 13,518 13,518 Market price per share: Beginning of period $ 2.38 $ 2.16 $ 1.82 $ 1.96 $ 2.40 End of period $ 1.43 $ 2.38 $ 2.16 $ 1.82 $ 1.96 Selected information and ratios: Ratio of expenses to average net assets 10.14 % 9.77 % 13.00 % 8.36 % 9.33 % Ratio of net investment loss to average net assets ( 10.14 %) ( 9.77 %) ( 12.20 %) ( 7.58 %) ( 8.22 %) Ratio of net increase (decrease) in net assets resulting from operations to average net assets ( 3.15 %) 7.38 % ( 30.82 %) 4.86 % 0.12 % Total return on market price (1) ( 39.92 %) 10.19 % 18.68 % ( 7.14 %) ( 18.33 %) (1) Total return = [(ending market price per share + year-to-date dividends paid - beginning market price per share) / beginning market price per share]. The accompanying notes are an integral part of these financial statements. 44 Table of Contents EQUUS TOTAL RETURN, INC. SCHEDULE OF INVESTMENTS DECEMBER 31, 2022 (in thousands, except share data) Name and Location of Date of Initial Cost of Fair Portfolio Company Industry Investment Investment Principal Investment Value (1) Control Investments: Majority-owned (2) : Equus Energy, LLC (3) Houston, TX Energy December 2011 Member interest ( 100 %) $ 8,111 $ 8,111 $ 15,650 Total Control Investments: Majority-owned (represents 72.3 % of total investments at fair value) 8,111 15,650 Temporary Cash Investments U.S. Treasury Bill Government December 2022 UST 0 % 1/23 5,998 5,998 5,998 Total Temporary Cash Investments (represents 27.7 % of total investments at fair value) 5,998 5,998 Total Investments $ 14,109 $ 21,648 (1) See Note 3 to the financial statements, Valuation of Investments. (2) Majority owned investments are generally defined under the 1940 Act as companies in which we own more than 50 % of the voting securities of the company. (3) Level 3 Portfolio Investment. The accompanying notes are an integral part of these financial statements. 45 Table of Contents SCHEDULE OF INVESTMENTS – (Continued) DECEMBER 31, 2022 (in thousands, except share data) Our portfolio securities are restricted from public sale without prior registration under the Securities Act of 1933 (hereafter, the “Securities Act”) or other relevant regulatory authority. We negotiate certain aspects of the method and timing of the disposition of our investment in each portfolio company, including registration rights and related costs. As an investment company classified as a business development company (“BDC”) under the Investment Company Act of 1940 (hereafter, the “1940 Act”), we may invest up to 30 % of our assets in non-qualifying portfolio investments, as permitted by the 1940 Act. Specifically, we may invest up to 30% of our assets in entities that are not considered “eligible portfolio companies” (as defined in the 1940 Act), including companies located outside of the United States, entities that are operating pursuant to certain exceptions under the 1940 Act, and publicly- traded entities with a market capitalization exceeding $ 250 million. As of December 31, 2022, we had invested 37.6 % of our assets in securities of portfolio companies that constituted qualifying investments under the 1940 Act. As of December 31, 2022, our investments are in enterprises that are considered eligible portfolio companies under the 1940 Act. We provide significant managerial assistance to a portfolio company that comprises 100% of the total value of the investments in portfolio securities as of December 31, 2022. We are classified as a “non-diversified” investment company under the 1940 Act, which means we are not limited in the proportion of our assets that may be invested in the securities of a single user. The value of one segment called ‘Energy’ includes one portfolio company and was 44.4 % of our net asset value, 37.6 % of our total assets and 100 % of our investments in portfolio company securities (at fair value) as of December 31, 2022. Changes in business or industry trends or in the financial condition, results of operations, or the market’s assessment of any single portfolio company will affect the net asset value and the market price of our common stock to a greater extent than would be the case if we were a “diversified” company holding numerous investments. Our investments in portfolio securities consist of the following types of securities as of December 31, 2022 (in thousands): Type of Securities Cost Fair Value Fair Value as Percentage of Net Assets Limited liability company investments $ 8,111 $ 15,650 44.4 % Total $ 8,111 $ 15,650 44.4 % The following is a summary by industry of the Fund’s investments in portfolio securities as of December 31, 2022 (in thousands): Industry Fair Value Fair Value as Percentage of Net Assets Energy $ 15,650 44.4 % Total $ 15,650 44.4 % The accompanying notes are an integral part of these financial statements. 46 Table of Contents EQUUS TOTAL RETURN, INC. SCHEDULE OF INVESTMENTS DECEMBER 31, 2021 (in thousands, except share data) Name and Location of Date of Initial Cost of Fair Portfolio Company Industry Investment Investment Principal Investment Value (1) Control Investments: Majority-owned (2) : Equus Energy, LLC (3) Houston, TX Energy December 2011 Member interest ( 100 %) $ 7,961 $ 7,961 $ 13,000 Total Control Investments: Majority-owned (represents 83.9 % of total investments at fair value) 7,961 13,000 Temporary Cash Investments U.S. Treasury Bill Government December 2021 UST 0 % 1/22 2,500 2,500 2,500 Total Temporary Cash Investments (represents 16.1 % of total investments at fair value) 2,500 2,500 Total Investments $ 10,461 $ 15,500 (1) See Note 3 to the financial statements, Valuation of Investments. (2) Majority owned investments are generally defined under the 1940 Act as companies in which we own more than 50 % of the voting securities of the company. (3) Level 3 Portfolio Investment. The accompanying notes are an integral part of these financial statements. 47 Table of Contents SCHEDULE OF INVESTMENTS – (Continued) DECEMBER 31, 2021 (in thousands, except share data) Our portfolio securities are restricted from public sale without prior registration under the Securities Act or other relevant regulatory authority. We negotiate certain aspects of the method and timing of the disposition of our investment in each portfolio company, including registration rights and related costs. As a BDC, we may invest up to 30 % of our assets in non-qualifying portfolio investments, as permitted by the 1940 Act. Specifically, we may invest up to 30% of our assets in entities that are not considered “eligible portfolio companies” (as defined in the 1940 Act), including companies located outside of the United States, entities that are operating pursuant to certain exceptions under the 1940 Act, and publicly- traded entities with a market capitalization exceeding $ 250 million. As of December 31, 2021, we had invested 32.7 % of our assets in securities of portfolio companies that constituted qualifying investments under the 1940 Act. As of December 31, 2021, our investments are in enterprises that are considered eligible portfolio companies under the 1940 Act. We provide significant managerial assistance to a portfolio company that comprises 100% of the total value of the investments in portfolio securities as of December 31, 2021. We are classified as a “non-diversified” investment company under the 1940 Act, which means we are not limited in the proportion of our assets that may be invested in the securities of a single user. The value of one segment called “Energy” includes one portfolio company and was 35.7 % of our net asset value, 32.7 % of our total assets and 100 % of our investments in portfolio company securities (at fair value) as of December 31, 2021. Changes in business or industry trends or in the financial condition, results of operations, or the market’s assessment of any single portfolio company will affect the net asset value and the market price of our common stock to a greater extent than would be the case if we were a “diversified” company holding numerous investments. Our investments in portfolio securities consist of the following types of securities as of December 31, 2021 (in thousands): Type of Securities Cost Fair Value Fair Value as Percentage of Net Assets Limited liability company investments $ 7,961 $ 13,000 35.7 % Total $ 7,961 $ 13,000 35.7 % The following is a summary by industry of the Fund’s investments in portfolio securities as of December 31, 2021 (in thousands): Industry Fair Value Fair Value as Percentage of Net Assets Energy $ 13,000 35.7 % Total $ 13,000 35.7 % The accompanying notes are an integral part of these financial statements. 48 Table of Contents EQUUS TOTAL RETURN, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2022, 2021 AND 2020 (1) ORGANIZATION AND BUSINESS PURPOSE About the Company— Equus Total Return, Inc. (“we,” “us,” “our,” “Equus” the “Company” and the “Fund”), a Delaware corporation, was formed by Equus Investments II, L.P. (the “Partnership”) on August 16, 1991. On July 1, 1992, the Partnership was reorganized and all of the assets and liabilities of the Partnership were transferred to the Fund in exchange for shares of common stock of the Fund. Our shares trade on the New York Stock Exchange (“NYSE”) under the symbol ‘EQS’. On August 11, 2006, our shareholders approved the change of the Fund’s investment strategy to a total return investment objective. This strategy seeks to provide the highest total return, consisting of capital appreciation and current income. In connection with this strategic investment change, the shareholders also approved the change of name from Equus II Incorporated to Equus Total Return, Inc. On January 20, 2021, holders of a majority of the outstanding common stock of the Fund approved the restatement of our Certificate of Incorporation to increase the number of our authorized shares of common stock from 50,000,000 to 100,000,000 , and the number of our authorized shares of preferred stock from 5,000,000 to 10,000,000 . As of December 31, 2022, we had 13,518,146 shares of common stock outstanding and no shares of preferred stock outstanding. We attempt to maximize the return to stockholders in the form of current investment income and long-term capital gains by investing in the debt and equity securities of companies with a total enterprise value between $ 5.0 million and $ 75.0 million, although we may engage in transactions with smaller or larger investee companies from time to time. We seek to invest primarily in companies pursuing growth either through acquisition or organically, leveraged buyouts, management buyouts and recapitalizations of existing businesses or special situations. Our income-producing investments consist principally of debt securities including subordinated debt, debt convertible into common or preferred stock, or debt combined with warrants and common and preferred stock. Debt and preferred equity financing may also be used to create long-term capital appreciation through the exercise and sale of warrants received in connection with the financing. We seek to achieve capital appreciation by making investments in equity and equity-oriented securities issued by privately-owned companies in transactions negotiated directly with such companies. Given market conditions over the past several years and the performance of our portfolio, our Management and Board of Directors believe it prudent to continue to review alternatives to refine and further clarify the current strategies. We elected to be treated as a BDC under the Investment Company Act of 1940 Act (“1940 Act”), although our shareholders authorized us to withdraw this election prior to February 28, 2023 and will likely do so again in the future. We currently qualify as a regulated investment company (“RIC”) for federal income tax purposes and, therefore, are not required to pay corporate income taxes on any income or gains that we distribute to our stockholders. We have certain wholly owned taxable subsidiaries (“Taxable Subsidiaries”) each of which holds one or more portfolio investments listed on our Schedules of Investments. The purpose of these Taxable Subsidiaries is to permit us to hold certain income- producing investments or portfolio companies organized as limited liability companies, or LLCs, (or other forms of pass-through entities) and still satisfy the RIC tax requirement that at least 90% of our gross revenue for income tax purposes must consist of investment income. Absent the Taxable Subsidiaries, a portion of the gross income of these income-producing investments or of any LLC (or other pass-through entity) portfolio investment, as the case may be, would flow through directly to us for the 90% test. To the extent that such income did not consist of investment income, it could jeopardize our ability to qualify as a RIC and, therefore, cause us to incur significant federal income taxes. The income of the LLCs (or other pass-through entities) owned by Taxable Subsidiaries is taxed to the Taxable Subsidiaries and does not flow through to us, thereby helping us preserve our RIC status and resultant tax advantages. We do not consolidate the Taxable Subsidiaries for income tax purposes, with the exception of Texas Margins Tax, which is an entity level tax. The Taxable Subsidiaries may generate income tax expense because of the Taxable Subsidiaries’ ownership of the portfolio companies. We reflect any such income tax expense on our Statements of Operations. (2) LIQUIDITY AND FINANCING ARRANGEMENTS As of December 31, 2022, we had cash and cash equivalents of $ 19.3 million. We had $ 15.7 million of our net assets of $ 35.2 million invested in portfolio securities. We also had $ 6.0 million of temporary cash investments and restricted cash, including primarily the proceeds of a quarter-end margin loan that we incurred to maintain the diversification requirements applicable to a RIC. Of this amount, $ 6.0 million was invested in U.S. Treasury bills and $ 0.06 million represented a required 1% brokerage margin deposit. These securities were held by a securities brokerage firm and pledged along with other assets to secure repayment of the margin loan. The U.S. Treasury bills matured January 3, 2023 and we subsequently repaid this margin loan. The margin interest was paid on February 3, 2023. As of December 31, 2021, we had cash and cash equivalents of $ 23.5 million. We had $ 13.0 million of our net assets of $ 36.4 million invested in portfolio securities. We also had $ 2.5 million of temporary cash investments and restricted cash, including primarily the proceeds of a quarter-end margin loan that we incurred to maintain the diversification requirements applicable to a RIC. Of this amount, $ 2.5 million was invested in U.S. Treasury bills and $ 0.02 million represented a required 1% brokerage margin deposit. These securities were held by a securities brokerage firm and pledged along with other assets to secure repayment of the margin loan. The U.S. Treasury bills matured January 4, 2022 and we subsequently repaid this margin loan. The margin interest was paid on February 3, 2022. 49 Table of Contents During 2022 and 2021, we borrowed sufficient funds to maintain the Fund’s RIC status by utilizing a margin account with a securities brokerage firm. There is no assurance that such arrangement will be available in the future. If we are unable to borrow funds to make qualifying investments, we may no longer qualify as a RIC. We would then be subject to corporate income tax on the Fund’s net investment income and realized capital gains, and distributions to stockholders would be subject to income tax as ordinary dividends. If we continue to be a BDC, failure to continue to qualify as a RIC could be material to us and our stockholders. None of our cash deposits are insured by the FDIC in excess of $ 250,000 . (3) SIGNIFICANT ACCOUNTING POLICIES The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements: Use of Estimates —The preparation of financial statements in accordance with accounting principles generally accepted in the United States (“GAAP”) requires us to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Although we believe the estimates and assumptions used in preparing these financial statements and related notes are reasonable in light of known facts and circumstances, actual results could differ from those estimates. Consolidation —In accordance with Article 6 of Regulation S-X under the Securities Act of 1933, we do not consolidate portfolio company investments. Under the investment company rules and regulations pursuant to the American Institute of Certified Public Accountants (“AICPA”) Audit and Accounting Guide for Investment Companies, codified in Accounting Standards Committee (“ASC”) 946, we are precluded from consolidating any entity other than another investment company, except that ASC 946 provides for the consolidation of a controlled operating company that provides substantially all of its services to the investment company or its consolidated subsidiaries. Valuation of Investments— For most of our investments, market quotations are not available. With respect to investments for which market quotations are not readily available or when such market quotations are deemed not to represent fair value, our Board has approved a multi-step valuation process each quarter, as described below: 1. Each portfolio company or investment is reviewed by our investment professionals; 2. With respect to investments with a fair value exceeding $2.5 million that have been held for more than one year, we engage independent valuation firms to assist our investment professionals. These independent valuation firms conduct independent valuations and make their own independent assessments; 3. Our Management produces a report that summarizes each of our portfolio investments and recommends a fair value of each such investment as of the date of the report; 4. The Audit Committee of our Board reviews and discusses the preliminary valuation of our portfolio investments as recommended by Management in their report and any reports or recommendations of the independent valuation firms, and then approves and recommends the fair values of our investments so determined to our Board for final approval; and 5. The Board discusses valuations and determines the fair value of each portfolio investment in good faith based on the input of our Management, the respective independent valuation firm, as applicable, and the Audit Committee. During the first twelve months after an investment is made, we rely on the original investment amount to determine the fair value unless significant developments have occurred during this twelve-month period which would indicate a material effect on the portfolio company (such as results of operations or changes in general market conditions). 50 Table of Contents Investments are valued utilizing a yield analysis, enterprise value (“EV”) analysis, net asset value analysis, liquidation analysis, discounted cash flow analysis, or a combination of methods, as appropriate. The yield analysis uses loan spreads and other relevant information implied by market data involving identical or comparable assets or liabilities. Under the EV analysis, the EV of a portfolio company is first determined and allocated over the portfolio company’s securities in order of their preference relative to one another (i.e., “waterfall” allocation). To determine the EV, we typically use a market multiples approach that considers relevant and applicable market trading data of guideline public companies, transaction metrics from precedent M&A transactions and/or a discounted cash flow analysis. The net asset value analysis is used to derive a value of an underlying investment (such as real estate property) by dividing a relevant earnings stream by an appropriate capitalization rate. For this purpose, we consider capitalization rates for similar properties as may be obtained from guideline public companies and/or relevant transactions. The liquidation analysis is intended to approximate the net recovery value of an investment based on, among other things, assumptions regarding liquidation proceeds based on a hypothetical liquidation of a portfolio company’s assets. The discounted cash flow analysis uses valuation techniques to convert future cash flows or earnings to a range of fair values from which a single estimate may be derived utilizing an appropriate discount rate. The measurement is based on the net present value indicated by current market expectations about those future amounts. In applying these methodologies, additional factors that we consider in fair value pricing our investments may include, as we deem relevant: security covenants, call protection provisions, and information rights; the nature and realizable value of any collateral; the portfolio company’s ability to make payments; the principal markets in which the portfolio company does business; publicly available financial ratios of peer companies; the principal market; and enterprise values, among other factors. Also, any failure by a portfolio company to achieve its business plan or obtain and maintain its financing arrangements could result in increased volatility and result in a significant and rapid change in its value. Our general intent is to hold our loans to maturity when appraising our privately held debt investments. As such, we believe that the fair value will not exceed the cost of the investment. However, in addition to the previously described analysis involving allocation of value to the debt instrument, we perform a yield analysis assuming a hypothetical current sale of the security to determine if a debt security has been impaired. The yield analysis considers changes in interest rates and changes in leverage levels of the portfolio company as compared to the market interest rates and leverage levels. Assuming the credit quality of the portfolio company remains stable, the Fund will use the value determined by the yield analysis as the fair value for that security if less than the cost of the investment. We record unrealized depreciation on investments when we determine that the fair value of a security is less than its cost basis, and will record unrealized appreciation when we determine that the fair value is greater than its cost basis. Fair Value Measurement—Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date and sets out a fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). Inputs are broadly defined as assumptions market participants would use in pricing an asset or liability. The three levels of the fair value hierarchy are described below: Level 1—Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 2—Inputs other than quoted prices within Level 1 that are observable for the asset or liability, either directly or indirectly; and fair value is determined through the use of models or other valuation methodologies. Level 3—Inputs are unobservable for the asset or liability and include situations where there is little, if any, market activity for the asset or liability. The inputs into the determination of fair value are based upon the best information under the circumstances and may require significant management judgment or estimation. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the investment. 51 Table of Contents Investments for which prices are not observable are generally private investments in the debt and equity securities of operating companies. One of the primary valuation methods used to estimate the fair value of these Level 3 investments is the discounted cash flow method (although a liquidation analysis, option theoretical, or other methodology may be used when more appropriate). The discounted cash flow approach to determine fair value (or a range of fair values) involves applying an appropriate discount rate(s) to the estimated future cash flows using various relevant factors depending on investment type, including comparing the latest arm’s length or market transactions involving the subject security to the selected benchmark credit spread, assumed growth rate (in cash flows), and capitalization rates/multiples (for determining terminal values of underlying portfolio companies). The valuation based on the inputs determined to be the most reasonable and probable is used as the fair value of the investment. The determination of fair value using these methodologies may take into consideration a range of factors including, but not limited to, the price at which the investment was acquired, the nature of the investment, local market conditions, trading values on public exchanges for comparable securities, current and projected operating performance, financing transactions subsequent to the acquisition of the investment and anticipated financing transactions after the valuation date To assess the reasonableness of the discounted cash flow approach, the fair value of equity securities, including warrants, in portfolio companies may also consider the market approach—that is, through analyzing and applying to the underlying portfolio companies, market valuation multiples of publicly-traded firms engaged in businesses similar to those of the portfolio companies. The market approach to determining the fair value of a portfolio company’s equity security (or securities) will typically involve: (1) applying to the portfolio company’s trailing twelve months (or current year projected) EBITDA, a low to high range of enterprise value to EBITDA multiples that are derived from an analysis of publicly-traded comparable companies, in order to arrive at a range of enterprise values for the portfolio company; (2) subtracting from the range of calculated enterprise values the outstanding balances of any debt or equity securities that would be senior in right of payment to the equity securities we hold; and (3) multiplying the range of equity values derived therefrom by our ownership share of such equity tranche in order to arrive at a range of fair values for our equity security (or securities). Application of these valuation methodologies involves a significant degree of judgment by Management. Due to the inherent uncertainty of determining the fair value of Level 3 investments that do not have a readily available market value, the fair value of the investments may differ significantly from the values that would have been used had a ready market existed for such investments and may differ materially from the values that may ultimately be received or settled. Further, such investments are generally subject to legal and other restrictions or otherwise are less liquid than publicly traded instruments. If we were required to liquidate a portfolio investment in a forced or liquidation sale, we might realize significantly less than the value at which such investment had previously been recorded. With respect to Level 3 investments, where sufficient market quotations are not readily available or for which no or an insufficient number of indicative prices from pricing services or brokers or dealers have been received, we undertake, on a quarterly basis, our valuation process as described above. We assess the levels of the investments at each measurement date, and transfers between levels are recognized on the subsequent measurement date closest in time to the actual date of the event or change in circumstances that caused the transfer. There were no transfers to or from Level 3 for the years ended December 31, 2022 and 2021. As of December 31, 2022, investments measured at fair value on a recurring basis are categorized in the tables below based on the lowest level of significant input to the valuations: Fair Value Measurements as of December 31, 2022 (in thousands) Total Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Assets Investments: Control investments $ 15,650 $ — $ — $ 15,650 Total investments 15,650 — — 15,650 Temporary cash investments 5,998 5,998 — — Total investments and temporary cash investments $ 21,648 $ 5,998 $ — $ 15,650 52 Table of Contents As of December 31, 2021, investments measured at fair value on a recurring basis are categorized in the tables below based on the lowest level of significant input to the valuations: Fair Value Measurements as of December 31, 2021 (in thousands) Total Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Assets Investments: Control investments $ 13,000 $ — $ — $ 13,000 Total investments 13,000 — — 13,000 Temporary cash investments 2,500 2,500 — — Total investments and temporary cash investments $ 15,500 $ 2,500 $ — $ 13,000 The following table provides a reconciliation of fair value changes during 2022 for all investments for which we determine fair value using significant unobservable (Level 3) inputs: Fair value measurements using significant unobservable inputs (Level 3) (in thousands) Control Investments Affiliate Investments Non-affiliate Investments Total Fair value as of January 1, 2022 $ 13,000 $ — $ — $ 13,000 Change in unrealized appreciation 2,500 — — 2,500 Purchases of portfolio securities 150 — — 150 Fair value as of December 31, 2022 $ 15,650 $ — $ — $ 15,650 The following table provides a reconciliation of fair value changes during 2021 for all investments for which we determine fair value using significant unobservable (Level 3) inputs: Fair Value Measurements as of December 31, 2021 (in thousands) Total Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Assets Investments: Control investments $ 13,000 $ — $ — $ 13,000 Total investments 13,000 2,500 — 13,000 Temporary cash investments 2,500 2,500 — — Total investments and temporary cash investments $ 15,500 $ 2,500 $ — $ 13,000 The following table provides a reconciliation of fair value changes during 2020 for all investments for which we determine fair value using significant unobservable (Level 3) inputs: Fair value measurements using significant unobservable inputs (Level 3) (in thousands) Control Investments Affiliate Investments Non-affiliate Investments Total Fair value as of January 1, 2020 $ 8,000 $ 26,500 $ 977 $ 35,477 Realized gain (loss) — 21,287 ( 266 ) 21,021 Change in unrealized appreciation ( 1,561 ) ( 26,150 ) — ( 27,711 ) Purchases of portfolio securities 561 — — 561 Proceeds from sales/dispositions — ( 21,637 ) ( 711 ) ( 22,348 ) Fair value as of December 31, 2020 $ 7,000 $ — $ — $ 7,000 53 Table of Contents Fair value measurements can be sensitive to changes in one or more of the valuation inputs. Changes in discount rates, EBITDA or EBITDA multiples (or revenue or revenue multiples), each in isolation, may change the fair value of certain of our investments. Generally, an increase/(decrease) in market yields, discount rates, or an increase/(decrease) in EBITDA or EBITDA multiples (or revenue or revenue multiples) may result in a corresponding increase/(decrease), respectively, in the fair value of certain of our investments. In the case of our holding in Equus Energy, we also consider acreage value, proved reserve multiples, daily production multiples, and discount rates. Finally, industry trends, market forecasts, and comparable transactions in sectors in which we hold a Level 3 investment are also taken into account when assessing the value of these investments. The following table summarizes the significant non-observable inputs in the fair value measurements of our Level 3 investments by category of investment and valuation technique as of December 31, 2022: Range (in thousands) Fair Value Valuation Techniques Unobservable Inputs Minimum Maximum Weighted Average Acreage Value (per acre) $ 1,500 $ 11,000 $ 4,062 Limited liability company investments $ 15,650 Guideline Transaction Method Proved Reserve Multiple 4.0 x 9.5 x 8.2 x Daily Production Multiple 18,578.7 x 47,513.7 x 40,284.4 x Discounted Cash Flow Discount Rate 11.0 % 11.0 % 11.0 % The following table summarizes the significant non-observable inputs in the fair value measurements of our Level 3 investments by category of investment and valuation technique as of December 31, 2021: Range (in thousands) Fair Value Valuation Techniques Unobservable Inputs Minimum Maximum Weighted Average Acreage Value (per acre) $ 1,500 $ 10,000 $ 5,750 Limited liability company investments $ 13,000 Guideline Transaction Method Proved Reserve Multiple 3.6 x 7.3 x 7.2 x Daily Production Multiple 15,425.3 x 37,215.1 x 36,900.6 x Discounted Cash Flow Discount Rate 11.0 % 11.0 % 11.0 % Because of the inherent uncertainty of the valuation of portfolio securities which do not have readily ascertainable market values, amounting to $ 15.7 million and $ 13.0 million as of December 31, 2022 and 2021, respectively, our fair value determinations may materially differ from the values that would have been used had a ready market existed for the securities. We adjust our net asset value for the changes in the value of our publicly held securities, if applicable, and material changes in the value of private securities, generally determined on a quarterly basis or as announced in a press release, and report those amounts to Lipper Analytical Services, Inc. Our net asset value appears in various publications, including Barron’s and The Wall Street Journal . Escrowed Receivables, at Estimated Fair Value — In December 2020, we sold our interest in PalletOne, Inc (“PalletOne”). A portion of the proceeds from the sale was placed in a cash escrow account to secure the representations and warranties made to the purchaser. The escrow receivable was valued at $ 3.4 million as of December 31, 2020. 54 Table of Contents During 2021, we received $ 3.8 million in cash from PalletOne. We recognized a capital gain of $ 0.4 million due to the change in our estimated fair value of this receivable. Investment Transactions —Investment transactions are recorded on the accrual method. Realized gains and losses on investments sold are computed on a specific identification basis. We classify our investments in accordance with the requirements of the 1940 Act. Under the 1940 Act, “Control Investments” are defined as investments in companies in which the Fund owns more than 25% of the voting securities or maintains greater than 50% of the board representation. Under the 1940 Act, “Affiliate Investments” are defined as those non-control investments in companies in which we own between 5% and 25% of the voting securities. Under the 1940 Act, “Non-affiliate Investments” are defined as investments that are neither Control Investments nor Affiliate Investments. Interest and Dividend Income Recognition —We record interest income, adjusted for amortization of premium and accretion of discount, on an accrual basis to the extent that we expect to collect such amounts. We accrete or amortize discounts and premiums on securities purchased over the life of the respective security using the effective yield method. The amortized cost of investments represents the original cost adjusted for the accretion of discount and/or amortization of premium on debt securities. We stop accruing interest on investments when we determine that interest is no longer collectible. We may also impair the accrued interest when we determine that all or a portion of the current accrual is uncollectible. If we receive any cash after determining that interest is no longer collectible, we treat such cash as payment on the principal balance until the entire principal balance has been repaid, before we recognize any additional interest income. We will write off uncollectible interest upon the occurrence of a definitive event such as a sale, bankruptcy, or reorganization of the relevant portfolio interest. Dividend income is recorded as dividends are declared by the portfolio company or at the point an obligation exists for the portfolio company to make a distribution. Payment in Kind Interest (PIK) —We may make loans in our portfolio that may pay PIK interest. We add PIK interest, if any, computed at the contractual rate specified in each loan agreement, to the principal balance of the loan and recorded as interest income. To maintain our status as a RIC, we must pay out to stockholders this non-cash source of income in the form of dividends even if we have not yet collected any cash in respect of such investments. We will continue to pay out net investment income and/or realized capital gains, if any, on an annual basis as required under the 1940 Act. Cash Flows —For purposes of the Statements of Cash Flows, we consider all highly liquid temporary cash investments purchased with an original maturity of three months or less to be cash equivalents. We include our investing activities within cash flows from operations. We exclude “Restricted Cash and Temporary Cash Investments” used for purposes of complying with RIC requirements from cash equivalents. The following table provides a reconciliation of cash and cash equivalents and restricted cash as reported within the consolidated balance sheet that sums to the total of the same amounts shown in the consolidated statement of cash flows as of December 31, 2022, 2021 and 2020: December 31, 2022 2021 2020 Cash and cash equivalents at end of period $ 19,224 $ 23,465 $ 23,639 Restricted cash at end of period 60 25 240 Cash and cash equivalents and restricted cash at end of period $ 19,284 $ 23,490 $ 23,879 Taxes —Although we are not required to maintain our RIC status as a BDC, historically, we have nevertheless complied with the requirements of the Code necessary to qualify as a RIC and, as such, are generally not subject to federal income taxes on otherwise taxable income (including net realized capital gains) if distributed to stockholders. For the year ended December 31, 2022, no tax accrual for income or excise tax was made. For the year ended December 31, 2021, we accrued a $ 0.04 million in corporate level income and excise tax in lieu of making a distribution of the net capital gain for the sale of PalletOne, Inc. This tax was paid in March 2022. We borrow money from time to time to maintain our tax status under the Code as a RIC. See Note 1 for discussion of Taxable Subsidiaries and see Note 2 for further discussion of the Fund’s RIC borrowings. 55 Table of Contents All corporations incorporated in the State of Delaware are required to file an Annual Report and to pay a franchise tax. As a result, we paid Delaware Franchise tax in the amount of $ 0.02 million for the year ended December 31, 2022, $ 0.03 million for the year ended December 31, 2021 and $ 0.02 million for the years ended December 31, 2020, respectively. Texas margin tax applies to legal entities conducting business in Texas. The margin tax is based on our Texas sourced taxable margin. The tax is calculated by applying a tax rate to a base that considers both revenue and expenses and therefore has the characteristics of an income tax. For the year ended December 31, 2022, no state income tax is expected. No state income tax was due for the years ended December 31, 2021 and 2020. Distributable Earnings —The components that make up distributable earnings (accumulated undistributed deficit) on the Balance Sheet as of December 31, 2022 and 2021 are as follows: As of December 31, 2022 As of December 31, 2021 Accumulated undistributed net investment losses $ ( 47,430 ) $ ( 43,801 ) Unrealized appreciation of portfolio securities, net 7,539 5,039 Accumulated undistributed net capital gains 430 429 Accumulated deficit $ ( 39,461 ) $ ( 38,333 ) Share-Based Incentive Compensation —On June 13, 2016, our shareholders approved the adoption of our 2016 Equity Incentive Plan (“Incentive Plan”). On January 10, 2017, the SEC issued an order approving the Incentive Plan and certain awards intended to be made thereunder. The Incentive Plan is intended to promote the interests of the Fund by encouraging officers, employees, and directors of the Fund and its affiliates to acquire or increase their equity interest in the Fund and to provide a means whereby they may develop a proprietary interest in the development and financial success of the Fund, to encourage them to remain with and devote their best efforts to the business of the Fund, thereby advancing the interests of the Fund and its stockholders. The Incentive Plan is also intended to enhance the ability of the Fund and its affiliates to attract and retain the services of individuals who are essential for the growth and profitability of the Fund. The Incentive Plan permits the award of restricted stock as well as common stock purchase options. The maximum number of shares of common stock that are subject to awards granted under the Incentive Plan is 2,434,728 shares. The term of the Incentive Plan will expire on June 13, 2026. On March 17, 2017, we granted awards of restricted stock under the Plan to certain of our directors and executive officers in the aggregate amount of 844,500 shares . The awards are each subject to a vesting requirement over a 3-year period unless the recipient thereof is terminated or removed from their position as a director or executive officer without “cause”, or as a result of constructive termination, as such terms are defined in the respective award agreements entered into by each of the recipients and the Fund. As of December 31, 2020, all shares were vested. We account for share-based compensation using the fair value method, as prescribed by ASC 718, Compensation—Stock Compensation . Accordingly, for restricted stock awards, we measure the grant date fair value based upon the market price of our common stock on the date of the grant and amortize the fair value of the awards as share-based compensation expense over the requisite service period, which is generally the vesting term. For the years ended December 31, 2022, 2021 and 2020, we recorded compensation expense of $ 0 , $ 0 , and $ 0.08 million, respectively, in connection with these awards. (4) RELATED PARTY TRANSACTIONS AND AGREEMENTS Except as noted below, as compensation for services to the Fund, each Independent Director receives an annual fee of $ 40,000 paid quarterly in arrears, a fee of $ 2,000 for each meeting of the Board of Directors or committee thereof attended in person, a fee of $ 1,000 for participation in each telephonic meeting of the Board or committee thereof, and reimbursement of all out-of-pocket expenses relating to attendance at such meetings. The chair of each of our standing committees (audit, compensation, and nominating and governance) also receives an annual fee of $ 50,000 , payable quarterly in arrears. We may also pay other one-time or recurring fees to members of our Board of Directors in special circumstances. None of our interested directors receive annual fees for their service on the Board of Directors. We may also pay other one-time or recurring fees to members of our Board of Directors in special circumstances. None of our interested directors receive annual fees for their service on the Board of Directors. 56 Table of Contents In respect of services provided to the Fund by members of the Board not in connection with their roles and duties as directors, the Fund pays a rate of $ 300 per hour for services rendered. During the years ended December 31, 2020 we paid Kenneth I. Denos, P.C., a professional corporation owned by Kenneth I. Denos, a director of the Fund, $ 349,725 , for services provided to the Fund on an hourly basis pursuant to a month-to-month agreement. Effective November 1, 2020, we entered into a written agreement with Mr. Denos providing, in lieu of an hourly fee, base compensation of $ 360,000 per annum, as well as various annual and periodic bonuses based upon achievement of certain criteria, such as transformative acquisitions made by the Fund, and a percentage of the amount received in connection with the disposition of the Fund’s existing portfolio investments, as well as a percentage of the net amount received in connection with the disposition of future portfolio investments. (5) FEDERAL INCOME TAX MATTERS As a RIC, our tax liability is dependent upon whether an election is made to distribute taxable investment income and capital gains above any statutory requirement. For the year ended December 31, 2022, we have incurred net investment losses and no net capital gains or losses. As such, no income or excise tax was accrued or paid. While we incurred net investment losses and had net realized capital gains for the year ended December 31, 2021, we accrued $ 0.04 million in corporate level income and excise tax in lieu of making a distribution. This tax is was paid in March 2022. Our year-end for determining capital gains for purposes of Section 4982 of the Internal Revenue Service Code (the “Code”) is October 31. In general, we may take certain adjustments to the classification of net assets as a result of permanent book-to-tax differences, which may include differences in the book and tax basis of certain assets and liabilities, and undistributed net capital gains for which we have loss carryforwards, among other items. During the year ended December 31, 2021, according and pursuant to ASC 946-20-50, we recharacterized $ 18.5 million in accumulated undistributed net capital gains for which we had loss carryforwards, among other items. Accordingly, this recharacterization has increased capital in excess of par and decreased accumulated deficit. . There are no material book-to-tax differences for net investment income/losses, realized gains or unrealized appreciation/depreciation. For the years ended December 31, 2022 and December 31, 2021, there are no capital loss carryforwards. For the years ended December 31, 2020, we had approximately $ 0.3 million in capital losses of which can be carried forward indefinitely. Reclassification of returns of capital had no material book to tax differences for the three years ended December 31, 2022 and therefore has no material book to tax differences impacting accumulated earnings during that three-year period. We believe that any aggregate exposure for uncertain tax positions should not have a material impact on our financial statements as of December 31, 2022 or December 31, 2021. An uncertain tax position is measured as the largest amount of tax return benefits that does not have a greater than 50% likelihood of being realized upon ultimate settlement. We have not recorded an adjustment to our financial statements related to any uncertain tax positions. We will continue to evaluate our tax positions and recognize any future impact of uncertain tax positions as a charge to income in the applicable period in accordance with promulgated standards. The Fund’s accounting policy related to income tax penalties and interest assessments is to accrue for these costs and record a charge to expenses during the period that the Fund takes an uncertain tax position through resolution with the taxing authorities or expiration of the applicable statute of limitations. 57 Table of Contents All of the Fund’s federal and state tax returns for 2019 through 2022 remain open to examination (the State of Texas may be longer). We believe that there are no tax positions taken or expected to be taken that would significantly increase or decrease unrecognized tax benefits within twelve months of the reporting date. (6) COMMITMENTS AND CONTINGENCIES Lease Commitments . We had an operating lease for office space that expired in September 2014. Our current office space lease is month-to-month. Rent expense under the operating lease agreement, inclusive of common area maintenance costs, was $ 90,000 , $ 90,000 , and $ 104,000 for the years ended December 31, 2022, December 31, 2021, and December 31, 2020, respectively. Portfolio Companies. As of December 31, 2022 and December 31, 2021, we had $ 0 and $ 0.15 million in outstanding commitments to our portfolio company investments. Under certain circumstances, we may be called on to make follow-on investments in certain portfolio companies. If we do not have sufficient funds to make follow-on investments, the portfolio company in need of the investment may be negatively impacted. Also, our equity interest in the estimated fair value of the portfolio company could be reduced. Follow-on investments may include capital infusions which are expenditures made directly to the portfolio company to ensure that operations are completed, thereby allowing the portfolio company to generate cash flows to service the debt. Legal Proceedings. From time to time, the Fund is also a party to certain proceedings incidental to the normal course of our business including the enforcement of our rights under contracts with our portfolio companies. While the outcome of these legal proceedings cannot at this time be predicted with certainty, we do not expect that these proceedings will have a material effect upon the Fund’s financial condition or results of operations. (7) PORTFOLIO SECURITIES 2022 Portfolio Activity The following table summarizes significant investment activity during the year ended December 31, 2022 (in thousands): Investment Activity New Investments Existing Investments Portfolio Company Cash Non-Cash Follow-On Cash PIK Total Equus Energy, LLC $ — $ — $ 150 $ — $ 150 $ — $ — $ 150 $ — $ 150 During 2022, we recorded an increase of $ 2.5 million in net unrealized appreciation, from an unrealized appreciation of $ 5.0 million as of December 31, 2021 to a net unrealized appreciation of $ 7.5 million as of December 31, 2022. Such change in unrealized appreciation resulted primarily from the increase in the fair value of our holdings in Equus Energy, LLC of $ 2.65 million, principally due to increases in the cost basis of this investment, as well as increases in oil and gas prices, as well as increases in the short- and long-term forward pricing curves for these commodities during 2022. 2021 Portfolio Activity During, 2021, we received $ 3.8 million in cash from the escrow receivable related to the sale of PalletOne. We recognized a capital gain of $ 0.4 million due to the settlement of the escrow receivable in connection with this sale. 58 Table of Contents The following table summarizes significant investment activity during the year ended December 31, 2021 (in thousands): Investment Activity New Investments Existing Investments Portfolio Company Cash Non-Cash Follow-On Cash PIK Total Equus Energy, LLC $ — $ — $ 350 $ — $ 350 $ — $ — $ 350 $ — $ 350 During 2021, we recorded an increase of $ 5.6 million in net unrealized appreciation, from an unrealized depreciation of $ 0.6 million as of December 31, 2020 to a net unrealized appreciation of $ 5.0 million as of December 31, 2021. Such change in unrealized appreciation resulted primarily from the increase in the fair value of our holdings in Equus Energy, LLC of $ 6.0 million, principally due to an increase in the cost basis of this investment, as well as increases in oil and gas prices, as well as increases in the short- and long-term forward pricing curves for these commodities during 2021. 2020 Portfolio Activity During 2020, we liquidated our investment in 5 th Element Tracking, LLC, receiving $ 1.2 million in cash, realizing a capital loss of $ 0.3 million. During 2020, we received 19,164 shares of MVC in the form of stock dividend payments. We sold our shares in MVC Capital, Inc. for approximately $ 4.5 million in cash, realizing a capital loss of $ 2.5 million. We also sold our interest in PalletOne, Inc., receiving $ 18.2 million in cash, $ 3.4 million in escrow, realizing a capital gain of $ 21.3 million. We also realized capital gains of $ 8 thousand as a result of disposition of temporary cash investments. The following table summarizes significant investment activity during the year ended December 31, 2020 (in thousands): Investment Activity New Investments Existing Investments Portfolio Company Cash Non-Cash Follow-On Non-cash PIK Total MVC Capital, Inc. $ — $ — $ — $ 156 $ 156 Equus Energy, LLC — — 561 — 561 $ — $ — $ 561 $ 156 $ 717 During 2020, we recorded a decrease of $ 26.0 million in net unrealized appreciation, from $ 25.4 million as of December 31, 2019 to a net unrealized depreciation of $ 0.6 million as of December 31, 2020. Such change in unrealized appreciation resulted primarily from the following changes: (i) Transfer of unrealized depreciation to realized loss of our holdings in MVC of $ 1.7 million in connection with the sale of our shares of MVC; (ii) Transfer of unrealized appreciation to realized gain of our holdings in PalletOne, Inc. of $ 26.1 million in connection with the sale of our common shares of PalletOne, Inc.; and, (iii) Decrease in the fair value of our holdings in Equus Energy, LLC of $ 1.6 million, principally due to decreases in gas prices and decreases in the short- and long-term forward pricing curve for oil. 59 Table of Contents (8) EQUUS ENERGY, LLC Equus Energy, LLC (“Equus Energy”) was formed in November 2011 as a wholly-owned subsidiary of the Fund to make investments in companies in the energy sector, with particular emphasis on income-producing oil & gas properties. In December 2011, we contributed $ 250,000 to the capital of Equus Energy. On December 27, 2012, we invested an additional $ 6.8 million in Equus Energy for the purpose of additional working capital and to fund the purchase of $ 6.6 million in working interests presently consisting of 136 producing and non- producing oil and gas wells. On September 30, 2020, the Fund provided an additional $ 0.6 million in capital to Equus Energy for the purpose of additional working capital. On June 30, 2021, the Fund provided an additional $ 0.35 million in capital to Equus Energy for the purpose of additional working capital. On December 31, 2022, the Fund provided an additional $ 0.15 million in capital to Equus Energy for the purpose of additional working capital. The working interests include associated development rights of approximately 21,320 acres situated on 9 separate properties in Texas and Oklahoma. The working interests range from a de minimus amount to 50% of the leasehold that includes these wells. The wells are operated by a number of operators, including Burk Royalty, which has operating responsibility for all of Equus Energy’s 22 producing well interests located in the Conger Field, a productive oil and gas field on the edge of the Permian Basin that has experienced successful gas and hydrocarbon extraction in multiple formations. Equus Energy, which holds a 50 % working interest in each of these Conger Field wells, is seeking to effect a recompletion program of existing Conger Field wells to the Wolfcamp formation, a zone containing oil as well as gas and natural gas liquids. Part of Equus Energy’s acreage rights described above also includes a 50 % working interest in possible new drilling to the base of the Canyon formation (appx. 8,500 feet) on 2,400 acres in the Conger Field. Also included in the interests acquired by Equus Energy are working interests of 7.5 % and 2.5 % in the Burnell and North Pettus Units, respectively, which collectively comprise approximately 13,000 acres located in the area known as the “Eagle Ford Shale” play. Below is selected financial information from the audited financial statements of Equus Energy as of December 31, 2022 and 2021, and for the years ended December 31, 2022, 2021 and 2020 (in thousands): EQUUS ENERGY, LLC and SUBSIDIARY Condensed Consolidated Balance Sheets December 31 December 31 2022 2021 Assets Current assets: Cash and cash equivalents $ 205 $ 640 Accounts receivable 208 215 Other current assets 12 — Total current assets 425 855 Oil and gas properties 8,155 8,097 Less: accumulated depletion, depreciation and amortization ( 8,095 ) ( 8,093 ) Net oil and gas properties 60 4 Total assets $ 485 $ 859 Liabilities and member's deficit Current liabilities: Accounts payable and other $ 110 $ 103 Due to affiliate 350 350 Total current liabilities 460 453 Asset retirement obligations 216 214 Total liabilities 676 667 Total member's (deficit) equity ( 191 ) 192 Total liabilities and member's (deficit) equity $ 485 $ 859 60 Table of Contents EQUUS ENERGY, LLC and SUBSIDIARY Condensed Consolidated Statements of Operations Year Ended December 31, 2022 2021 2020 Operating revenue $ 1,063 $ 855 $ 482 Operating expenses Direct operating expenses 420 595 659 Gain on sale of oil and gas properties — ( 22 ) — Depletion, depreciation, amortization and accretion 4 7 26 Impairment of oil and gas properties — 32 253 Salaries 383 — — Professional fees 713 306 236 General and administrative 76 6 7 Total operating expenses 1,596 924 1,181 Net loss $ ( 533 ) $ ( 69 ) $ ( 699 ) EQUUS ENERGY, LLC and SUBSIDIARY Condensed Consolidated Statements of Cash Flows Year ended December 31, 2022 2021 2020 Cash flows from operating activities: Net loss $ ( 533 ) $ ( 69 ) $ ( 699 ) Adjustments to reconcile net income (loss) to net cash used in operating activities: Depletion, depreciation and amortization 2 — 19 Gain on sale of oil and gas properties — ( 22 ) — Accretion expense 2 7 7 Impairment — 32 253 Changes in operating assets and liabilities: Accounts receivable 7 ( 138 ) ( 12 ) Prepaid expenses and other current assets ( 12 ) — 34 Accounts payable and accrued liabilities 7 ( 127 ) 146 Net cash used in operating activities ( 527 ) ( 317 ) ( 252 ) Cash flows from investing activities: Investment in oil & gas properties ( 58 ) ( 36 ) ( 30 ) Sale of oil & gas properties — 22 — Net cash used in investing activities ( 58 ) ( 14 ) ( 30 ) Cash flows from financing activities: Capital contribution 150 350 — Due to parent — — 350 Net cash provided by investing activities 150 350 350 Net increase (decrease) in cash ( 435 ) 19 68 Cash and cash equivalents at beginning of period 640 621 553 Cash and cash equivalents at end of period $ 205 $ 640 $ 621 Non-cash operating and financing activities: Conversion of related party payable to member’s (deficit) equity $ — $ — $ 561 61 Table of Contents (9) RECENT ACCOUNTING PRONOUNCEMENTS Recent Accounting Standards —We consider the applicability and impact of all accounting standard updates (“ASU”) issued by the Financial Accounting Standards Board (“FASB”). ASUs not listed below were assessed and either determined to be not applicable or expected to have minimal impact on our financial statements. Accounting Standards Not Yet Adopted —In June 2022, the FASB issued ASU 2022-03, “Fair Value Measurement (Topic 820) - Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions”, which was issued to (1) clarify the guidance in Topic 820, Fair Value Measurement, when measuring the fair value of an equity security subject to contractual restrictions that prohibit the sale of an equity security, (2) to amend a related illustrative example, and (3) to introduce new disclosure requirements for equity securities subject to contractual sale restrictions that are measured at fair value in accordance with Topic 820. The new guidance is effective for interim and annual periods beginning after December 15, 2023. The Company is currently evaluating the impact of the new standard on the Company's financial statements and related disclosures. Accounting Standards Recently Adopted —In May 2020, the SEC adopted rule amendments that will impact the requirement of investment companies, including BDCs, to disclose the financial statements of certain of their portfolio companies or acquired funds (the “Final Rules”). The Final Rules adopted a new definition of “significant subsidiary” set forth in Rule 1-02(w)(2) of Regulation S-X under the Securities Act. Rules 3-09 and 4-08(g) of Regulation S-X require investment companies to include separate financial statements or summary financial information, respectively, in such investment company’s periodic reports for any portfolio company that meets the definition of “significant subsidiary.” The Final Rules amend the definition of “significant subsidiary” in a manner that is intended to more accurately capture those portfolio companies that are more likely to materially impact the financial condition of an investment company. The Final Rules became effective on January 1, 2021, but voluntary compliance was permitted in advance of the effective date. The Company elected to comply with the Final Rules effective June 30, 2020 which reduced the requirement for the Company to provide separate audited financial statements and summarized financial information for its controlled portfolio companies going forward. In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes. The new standard is effective for the Company beginning on January 1, 2021. There was no impact on the financial statements or financial statement disclosures. (10) SUBSEQUENT EVENTS Our Management performed an evaluation of the Fund’s activity through the date the financial statements were issued, noting the following subsequent events: On January 3, 2023, our holding in $ 6.0 million in U. S. Treasury Bills matured and we repaid our year-end margin loan. 62 Table of Contents Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.